Telecom: Merged, Converged, On the Verge

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The Darwinian telecom industry continues to devour its weaker members, even as it prepares for the next great leap in sophisticated networking services. If it keeps up, the result might be a tremendous benefit for corporate customers.

Marvin Maynard feels the telecom industry's pain, and sometimes it feels pretty good. "Every time I do a new contract I get a lower unit cost, or a new service, or better reliability," says the chief information officer of Jefferson-Pilot Corp., a $4 billion insurer headquartered in Greensboro, N.C.

But the roiling telecom industry is causing Maynard some headaches, too. "The resolution of some problems has not been a good experience of late," he says, citing a recent phone outage at one of JP's key remote sites that dragged on, thanks to confusion over which network provider was responsible for fixing it.

Meanwhile, the technology that is driving change in the industry has not yet delivered on its promises. Voice over IP is the coming thing, but Maynard's data networks aren't ready to support it throughout the company, which operates nationwide. Powerful handheld devices and mobile services can keep JP's field agents connected, but a lack of standards limits the types of device the company can support.

"The networks are converging, and the opportunity is enormous," says Maynard. "But the platforms are diverging, and that concerns me a bit."

Opportunity, progress, confusion, concern: that's the telecom customer experience, circa mid-2005. Big mergers have been coming so fast that it's tough to keep track of which company owns what anymore, much less enumerate the different services they offer, and say they will offer soon. But those mergers have begun to bring the future into focus.

The combination of Sprint Corp. with Nextel Communications Inc., announced in December 2004; SBC Communications Inc.'s purchase of AT&T Corp., in January; and Verizon Communications Inc.'s pricey acquisition of MCI Inc., in May, created three behemoths built to compete in a converging market. Even if it is not yet clear who will dominate a future in which voice telecommunications are subsumed into data communications, the long-anticipated convergence of services and networks has taken a big step forward.

Like a Greek tragedy, the telecom industry story is a generational saga, complete with hubris and incest (see "Family Tree," opposite). The era of the standalone long-distance company has passed, and the era of price-per-minute voice communications is ending, taking hundreds of billions of dollars in revenue with it.

After more than a decade of consolidation, the mergers between the regional operating companies (formed after the breakup of Ma Bell) and the long-distance and wireless companies may be approaching a critical mass.

"I would never say consolidation has reached a steady state or a final point, but we are unlikely to see deals as big, or with such high impact," says Raj Pherwani, a San Francisco-based partner at Bain & Co. who follows the telecom industry.

The newly merged supercarriersincluding SBC, Verizon and Sprint Nextelaim to deliver what Pherwani calls the first wave of convergence: presenting customers with one bill and a single source of sales support for a variety of voice and data services via wireless and wireline networks.

He expects to see this front-end convergence happen in earnest over the next 12 to 24 months. The next wave is what he calls "feature convergence," where services such as voice mail will work seamlessly on any platform.

Then comes the ability to share data from various devices across both wireless and wireline networks, which will require a set of protocols still under development, as well as improvements to network intelligence. Finally, Pherwani says, comes network convergence: a common core network that can handle large volumes of any kind of data. That, he adds, is still perhaps five years from making a real difference in terms of ease of use and additional services to customers, and perhaps a decade away from full rollout.

This is the transition that the big phone companies must navigate. "The future of telecom is 'techcom,' the convergence of tech and telecom where voice is integrated into software applications and the phone is integrated into other devices," says Scott Cleland, principal of the Washington, D.C.-based Precursor Group, an independent analysis firm.

"Just as e-mail has largely replaced the fax, multifunction VoIP will replace circuit phone service, and multimode techcom handsets will increasingly replace traditional phones because they are substantially better and cheapera dream come true for the enterprise."

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